Home values across the United States are back to pre-boom levels – and the market is fundamentally stronger than before the global crash.

Market experts say rising prices are being fuelled by low supply and strong demand. These are different to speculation that brought down the 2006 market, says the realtor.com website.

Stronger housing market

On the surface, today’s housing market looks suspiciously similar to the pre-recession years. There is rising home prices and feverish buyer demand. However, a deeper analytical assessment reveals material differences. These include historically low inventory levels, much tighter lending standards and significant job and household growth — and a strong housing market backed by economic fundamentals.

The U.S. median home sales price in 2016 was $236,000, 2% higher than in 2006, according to NAR/Moody Analytics. In fact, 31 of the 50 largest U.S. metros are back to pre-boom levels.

Danielle Hale, chief economist for realtor.com, says, “As we compare today’s market dynamics to those of a decade ago, it’s important to remember rising prices didn’t cause the housing crash.

“It was rising prices stoked by subprime and low documentation mortgages, as well as people looking for short-term gains — versus today’s truer market vitality — that created the environment for the crash.”

The largest difference in the last decade is that lending standards are the tightest in almost 20 years. Today, the Dodd-Frank Wall Street Reform and Consumer Protection Act requires loan originators to show verified documentation that a borrower is able to repay the loan. As a result, the median 2017 home loan FICO score was 734. This is significantly up from 700 in 2006, on a scale of 330 – 830, says the Urban Institute.

The bottom 10% of borrowers also have much higher credit scores with a FICO of 649 in 2017, from 602 in 2006. While veterans and others with specialized mortgages can still put zero percent down, these mortgages include additional restrictions to ensure they can be paid back.

Severely constrained construction

“Lending standards are critical to the health of the market. Unlike today, the boom’s under-regulated lending environment allowed borrowing beyond repayable amounts and atypical mortgage products, which pushed up home prices without the backing of income and equity,” adds Mr Hale.

Pre-boom, the widespread belief that prices could never go down spurred rampant home flipping and building. Today, tight lending standards have kept flipping and over-building in check, but are contributing to severely constrained construction levels.

Prior to the crash, flipping became increasingly mainstream with amateur flippers taking on multiple loans. In 2006, the share of flipped homes reached 8.6 percent of all sales. With today’s tight lending environment limiting borrowing power, flipping accounted for 5 percent of sales in 2016, according to data from CoreLogic.

Over-building was another indicator of the unhealthy market conditions in the pre-boom. As prices rose, builders kept building, regardless of demand. In 2006, there were 1.4 single-family housing starts for every household formed. That is well above the healthy level of one necessary to keep up with the market, U.S. Census Bureau/Moody’s Analytics data suggests.

Strong employment and demand paired with severely limited supply is driving price escalation today. Employment was also strong in 2006, but years of over-building put an oversupply drag on the market.

In October 2017, unemployment is now at 4.1 percent — a 17-year low, with more than 150,000 jobs created on average each month in 2017, according to Bureau of Labor Statistics. In 30 of the 50 largest U.S. metros, unemployment is less than half of 2010 levels.

Jobs growth

In 2016, there were 8million more workers on payrolls than in 2006 and 10million more households. At the same time, there are 600,000 fewer total housing starts and nearly 700,000 fewer single-family housing starts.

“The healthy economy is creating more jobs and households, but not giving these people enough places to live. Rapid price increases will not last forever. We expect a gradual tapering as buyers are priced out of the market – not a market correction, but an easing of demand and price growth as renting or adding roommates becomes a more affordable alternative,” says Mr Hale.

Millennial job growth has also contributed to rising demand. In September, employment reached 79% in the 25-34 age group, back up to 2006 levels and 5% higher than 2010. In fact, millennials made up 52% of home shoppers this past spring and with the largest cohort of millennials expected to turn 30 in 2020, their demand for homes is only expected to increase.

On top of escalating demand, the supply of homes available also is significantly constrained. In 2016, single-family inventory reached a 22-year historic low at 1.45million homes for sale, NAR figures show. October 2017 marked the 26th consecutive month of year-over-year declines in realtor.com inventory.

The market is currently averaging 4.2 months’ supply, which is significantly faster than 2007’s 6.4 months’ supply. Vacancies also are very tight with for-sale vacancies dropping to 1.3million in 2016, compared to 1.9million in 2006. Rental vacancies hit 3.2million in 2016, compared to 3.7 in 2006.